Archive for February, 2009

Sector summary

Monday, February 9th, 2009

Lately, CNBC has been squawking about how well bank stocks have been doing lately in anticipation of the stimulus package. Sure, many of them have rallied recently, but their charts for the most part hardly scream “buy!” As proxies for this group, look at the charts of the financial spider, the XLF, and the regional banking ETF, the RKH. (In the interest of saving space, I’m only showing the chart of the RKH, but the XLF chart is very similar. )

You can see that the price has been channeling downwards. A breakout above this channel and above its $60 resistance on strong volume would be the signal to go long in this group.

The financial media has also been crowing about the comeback in the materials sector. Say what??? One certainly wouldn’t get that idea by looking at the PYZ, the materials ETF. It’s been doing a lot of nothing for the past several months as you can see if you look at the charts of its top ten holdings. The only bright spot in that group is the gold miner, Newmont Mining (NEW).

The PYZ has been channeling between $17 and $20. If it eventually manages to fill its exhaustion gap at $24, then that’s the time I would be convinced of a turnaround in the materials.

Utilities, Energy, and Agribusiness
The utilities (UTH), energy (XLE), and agribusiness (MOO) sectors have been in the process of consolidation for months. They all sport similar charts, so I’m only showing that of the energy spider, the XLE.

Upper resistance on the XLE is at $53; for the UTH it’s $100, and for the MOO (don’t you love that symbol?) it’s $30 and change. A break through these levels would be bullish.

Drugs & Health Care
The charts of the biotechs (BBH), health care (XLV), and the pharmaceutical companies (PPH) have also been consolidating and they are all threatening to break overhead resistance anytime now. Resistance levels for these sectors are as follows: BBH is $180; XLV is $27.50; PPH is $63.

Gold & Silver
Lately, the precious metals have been among the better performers. The GDX tracks the gold miners, the GLD holds gold bullion, and the SLV tracks silver. (Note that the SLV is a new fund and has only been around for two months.) Of the two gold ETFs, the GDX has been the hands-down winner lately, more than doubling in value since its October low. (GLD has “only” recovered 30% since then.)

The GDX needs to clear $39 resistance to continue its upward progress.

Consumer Staples & Consumer Discretionary
There are many sectors out there that look ugly, but I was mildly shocked to see consumer staples, the XLP, among them. The usual thinking is that in tough times people still need to buy food and toilet paper but apparently this time is, indeed, different. This sector has been consolidating, too, but to the downside rather than to the upside. It’s sitting right near it’s local low at $22 and I fear that a break through that will spell disaster for this group.

Interestingly, the chart of the consumer discretionary sector, the XLY, is better but not by much. The ETF is currently trading just over $20, two bucks above major support.

Internet Technologies
The charts of the internet ETFs are looking as if they’re poised to break out of their consolidation patterns. You can check out the charts yourself: Internet (HHH), Broadband (BDH), B2B (BHH), Internet Infrastructure (IIH). Most of these are thinly traded so bear that in mind when entering a position. It’s a good idea to use limit orders in these instances. For an overall look at this sector, check out the XLK, the Technology Spider. It’s been consolidating in the $16 range; a break above $18 would be your signal to start taking long positions.

You can see from the above charts that the financial media may be over-hyping the recent gains in some of the these sectors, especially in financials and materials. The future direction of the market will depend on how successful the stimulus package will be in putting money back into consumers pockets and confidence back into the financial system. Until then, there’s nothing wrong with keeping your cash stashed under your mattress.

Market mishigos

Friday, February 6th, 2009

The current Mercury retrograde has been hitting me hard. My car broke down not once but twice. To add insult to injury, my computer crashed necessitating a complete re-installation of all software. That took a better part of two days, which is why my blog has been dark this week.

But today I was able to do a little chart-surfing and found some interesting specimens that illustrate some aspects of technical analysis (TA). If you’re a novice in this area, you might find these charts educational; for you experts, you might glean some viable trades.

Channeling stocks
Some of the homebuilders seem to be in a channeling mode, meaning that the price oscillates between a lower level of support and an upper level of resistance. The way to play this type of pattern is to buy the stock when the price begins to bounce off its support level and sell when it nears resistance. As soon as the price starts to head back down, a short position can be taken and covered when the price nears support. (See Recipe #3: Chocolate Channeling Bars for further info.) Stocks don’t channel forever and when they do break one of these levels, chances are good that they’ll continue in that direction especially if they break to the upside on heavy volume. (Volume doesn’t have as much meaning on the downside.)

Below is a chart of Meritage Homes (NYSE: MTH). You can clearly see it bounce between the $10 and $15 levels. (There’s also an island reversal at the left side of the chart which is discussed below.) If you want to play any of the homebuilders, do note that their price directions will be directly tied to stimulus strategies so please be careful and read the news before you take any action.

Island Reversals
An island reversal is formed by two price gaps that separate the “island” segment from the rest of the chart. The left gap is called an exhaustion gap because that’s literally the last gasp of investor interest. The right gap is the breakaway gap signaling renewed interest, especially if it’s accompanied by strong volume on the upside.

The gaps themselves should be in the same price range, although some technicians broaden that requirement to include unequal prices. To me, that doesn’t look like an island, and I do think that equal price points are technically more significant, although I don’t have anything except experience to back me up on this.

Island reversals can look pretty much like anything; they can take the form of double tops (or bottoms), head and shoulders formations, or flat periods of consolidation—you name it. They can span up to several months or as little as one day. Generally, island reversals aren’t all that meaningful just by themselves but they do tend to add conviction to other patterns such as the ones listed above.

Below is a chart of i2 Technologies (NASDAQ: ITWO). It has just broken out of its island pattern on strong volume indicating a probable continuation in that direction. FYI, another stock that has just broken out of its island reversal on strong volume is Art Technology (NASDAQ: ARTG). (Chart not shown.)

Head & Shoulders Pattern
We’ve looked at H&S patterns many times before, so I won’t get into too much detail. (See Cooking Tools #1: Chart Pattern Reversals for more info.) An H&S pattern looks exactly like it sounds—three bumps on a chart where the middle bump is larger in magnitude than the other two. In bull markets, most H&S patterns look “normal,” meaning that the chart bumps are pointing up. In bear markets, inverse head & shoulders patterns are more the norm, and that’s what we have here with the chart of Ampal-American Israel Corp. (NASDAQ: AMPL).

The profit expectation for an H&S formation is given by the neckline value plus or minus the distance between the neckline and the top of the head (+ if it’s an inverse pattern and – if it’s a normal one). In the above case, the neckline is at $1.20 and the top of the head is at $0.55, so we should expect to see the stock rise to at least $1.85, which it has.

Another interesting inverse H&S pattern is shown in the chart of Ilumina (NASDAQ: ILMN) where an island reversal separates the H&S pattern from the rest of the chart. It broke its neckline on a breakaway gap accompanied by six times normal volume two days ago. With the neckline at $32 and the head peaking at $20, we’re looking at a $12 rise in the stock to $44, although I’d watch to see if it can break resistance at $40.

Well, I hope you’ve learned something on our mini-excursion into Chartland. Mercury is supposed to go direct soon and I’m praying that the god of electronics again smiles on me so I won’t have to keep my faithful readers deprived of their daily dose of the StockMarketCookBook.

MANDA Portfolio Addition: PharmaNet (PDGI)

Tuesday, February 3rd, 2009

PharmaNet Development Group Inc. (PDGI), a drug development services company, announced earlier today it has agreed to a $100 million acquisition by affiliates of JLL Partners Inc., a New York-based private equity investment firm. This is an all-cash deal set at $5 per PDGI share. The acquisition has the approval of the PDGI board and is expected to close by the end of the first quarter.

The transaction, which values PharmaNet’s stock at about $100 million, will be financed by a $250 million equity commitment from JLL. The company said the financing includes the funds to retire the $144 million principal of its outstanding convertible notes.

This looks like a solid deal to me so I picked up some PDGI shares for my MANDA (M&A) portfolio today for $4.60 giving a return of 8.7%.

Other MANDA news
MANDA component Rohm-Haas (ROH) yesterday declared a quarterly dividend of $0.41/share payable on March 2 to shareholders on record as of February 13. (So far in the portfolio, ROH has paid $1.23 per share in dividends.)

Company officials, miffed at acquiring company Dow Chemical’s toe-dragging in regards to closing the deal, today sent a strong “Get your act together or else!” message to Dow’s board. If push comes to shove, it doesn’t look good for the big guy as the terms of the deal put all of the onus on Dow. On the flip side, you can’t withdraw money from an empty bank, so where this deal stands at the moment is anyone’s guess.

Here’s the updated MANDA portfolio (click to enlarge table):